Trends and Future Prospects Of E/M Banking In India

Posted in Finance Articles, Total Reads: 3742 , Published on 02 October 2012

India has a great prospect to leverage the potential of e/m-banking and build a cash-light economy. In addition to IT edge and relatively dense population, the Government of India is clearly determined to achieve financial inclusion and is taking aggressive steps to see this happen.

Rendering financial services to the un-served or poor through a market-led approach is important for the sustainability of financial inclusion. However the lack of feasible business models has impeded market-led approaches being followed at scale. While this is evident across many countries and so does in India, which has seen many pilot projects that are still not sustainable.

There are many reforms and enrollment drives which have been undertaken by the Reserve Bank of India (RBI) and the Government of India over the last five years to give drift to the financial inclusion agenda. This has had its own positive and negative effects on the branchless banking initiatives. While the intervention of government has ensured some hope for the players involved like bank agents, it has also, diverted the focus from savings and credit services for the poor to remittances and government social security payments. This manifest one key risk in India which is financial inclusion agenda is largely determined by broader interests such as the distribution of MNREGA and other government transfers (EBTs).

It can be safely said that the RBI and government policy initiatives and reforms have considerably helped the development of e/m-banking systems. They have adopted technology prototypes (like smart cards and mobile based options) . These infrastructure advancements have given vent to a more market driven environment, which in fact, is the future face of the economy.

Although, there has been an upsurge in the consumer demand for electronic remittance and Electronic Benefit Transfers (EBT), the absence of compelling value-proposition in basic no-frills saving accounts is keeping the customers, the Business Correspondent Network Managers and the Indian banking system from realizing the full potential of the branchless banking model.

Emergence of Business Correspondent Network Managers

Business correspondent network managers (BCNM) as channel intermediaries depend on banks to a large extent for their products, pricing, branding, marketing and promotions and also for their survival. However, there are exceptions which are the analogous to IFMR, adopting a well-diversified approach to build portfolios of partnerships and products.

As a result, early moving BCNM’s look cast down in the past in many prospects. The major issues being concerned about are:-

A. Developing legal relations of this e-banking with their banking partners on one hand and with the agents or Customer Service Points (CSP’s) and the consumers on the other hand.

B. Negotiating revenue streams (the commissions received because of various activities undertaking on behalf of the banks) and a broader product mix to offer, in order to achieve liability, within time constraints.

Banks are rendering a yeoman’s service in enhancing legitimacy of Business Correspondents as their new distribution and service channel. Prominent banks like SBI, PNB and UBI are an upstart in their market endeavor by significantly displaying signage, tariff cards and service information at CSP locations. Local branch manager and staff are now more in light about BC activities and have been assigned mandates to supervise the Performance of the agents linked to their branches, to render the required operational assistance and acknowledge their issues.

Information of the agents linked to a particular branch is increasingly revealed at branches, to create awareness. At times, banks recruit new agents within the branch, by training and teaching them and enabling customers to open accounts and transact with the new agent, building familiarity and trust before the agent moves to an apprehended environment. Progressive banks have enabled integration BCNM’s to their Core Banking Systems (CBS) resulting in ease of access by BCNM’s to banking products, transactions and information, providing significant boost to their initiatives.

Mobile Network Operators and Large Corporate Houses Co-Venture.

With the popularity of collaborations between mobile network operators (MNO’s) and banks live up to the promise of financial inclusion, the RBI and TRAI (Telecom Regulatory Authority of India) have announced that they will harmonize and coordinate with each other to avoid any form of regularity conflict. The RBI is gradually strengthening and revising regulations based on mobile banking working group’s 2008 pragmatic perception and recommendations. Some of these encompass measures and procedures for banks to be hand and glove with telecom providers, fortifying the security framework, suggesting common standards for completing transactions etc. TRAI is focusing on dispute settlements and fixing tariff rates for mobile banking access.

In the previous year, many large Indian banks have partnered/co-ventured with large mobile network operations (MNO’s) and handset vendors to facilitate their connection through mobile channel by providing access to financial services. Few such deals are:

1. State Bank of India (India’s largest bank) with Airtel (India’s largest MNO)

2. ICICI Bank (India’s largest private sector bank) with Vodafone (India’s second largest MNO)

3. HDFC Bank with Vodafone (now rolling out after a pilot-test in Rajasthan)

4. Axis Bank (India’s second largest private sector bank) with Idea Cellular (an innovative and well penetrated MNO)

5. Union Bank (another large public sector bank) with Nokia Money

These MNOs have a distribution network of around 1.0 to 1.5 million retailers across India. This presents a great opportunity to build a nationwide network of agents – something that has so far been a challenge due fragmentation in financial inclusion space.

Future Drivers For E/M Banking

There are various factors, drivers that will empower Indian electronic and mobile banking to grow exponentially in the coming years.

Under-banked and Un-Banked Population

Out of 600,000 villages in India only one sixth, have banking services. Almost half of the country’s population is unbanked. The large section of the Indian population not just in rural areas but also in many segments of urban markets, offers a large untapped market with a tremendous business potential. Financial inclusion is slowly but surely being seen not just as a social responsibility, but as a potential business model too, for two reasons:

Firstly, the RBI is looking for real business cases and forcing banks for the same and secondly, because of the huge untapped market for banking services.

Demographic Factors

In India the population of youth (between the age of 14-29) is the largest youth population globally, which is around 27% of the total 1.2 billion. Furthermore, adding the age group of 30-44, the proportion is 47%. %. Apart from the huge size of this segment, they are among those who are the early adopters of latest technology and new services, which presents a huge opportunity for e/m-banking service providers.

It has been observed that for the majority, access to financial services is a household need, and not only an individual need, and if the account holder is illiterate, other members of the family are  competent enough to execute transactions and use electronic or mobile banking services.

Bank Based Services

It has been observed that poor people, whether in urban or rural completely understand the need for formal financial services and are well aware of the fact that they are losing money in the informal sector and whenever they leave money in the household. Many low income households also express a clear need for credit facilities – but 51% remain dependent on informal sector (other sources) moneylenders. Similarly, they are very aware of the drawbacks and costs of informal remittance schemes, and are to send money to family and friends.

For doing one transaction from a bank, a poor has to incur significant direct and opportunity cost. The direct cost associated with traveling to a bank branch is not insignificant. They have to incur about Rs.20 and opportunity costs of wage labour range from Rs.50 to Rs.150 and sometimes more. As a result there is growing willingness to conduct transactions through agents and to pay for these services. Majority of villagers are willing to pay for services that will reduce their real and opportunity costs.

India continues to be a unique market and regulatory environment with intense involvement of the regulator and the government. Hopefully, the rapid outreach will make the model sustainable for all the players, banks, BCNMs and agents and at the same time offer services really needed by the clients. These two ends are, of course, aligned and mutually beneficial. The gradual regulatory evolution to support BCs and banks in their outreach efforts continues – and the results are beginning to emerge.

The other exciting development is the move to encourage banks to have 25% of their branches in rural areas. These, presumably low cost branches, can become the hub for financial inclusion and support wider outreach of branchless banking outlets, while acting as nodes or hubs of the model. The antiquated post-office structure is also undergoing rapid transformation and all records will be computerized with plans to link post-offices within the next year.

Many of the lessons learned in the past can very well be applied by the banking sector. With government goading, the banks in India will soon recognize and respond to this.

This article has been authored by Rajiv Tripathi and Mohd. Faizan Khan from NMIMS Mumbai.

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